MFA Highlights Fundamental Flaws with Private Fund Advisers Rule in Comment Letter to SEC

 

April 25, 2022

Bryan Corbett: “The proposed rule will fundamentally alter the fruitful, longstanding relationships between private funds and their sophisticated investors, who will find it harder to deliver for beneficiaries.”

WASHINGTON, DC – Managed Funds Association (MFA), the trade association for the hedge fund and global alternative investment industry, today submitted a comment letter to the U.S. Securities and Exchange Commission (SEC) in response to a proposed rule on private fund advisers. MFA emphasizes fundamental flaws with the proposal that would lead to unintended consequences and harm investors. MFA is calling on the SEC to withdraw the proposal.

“Private funds play an essential role in the portfolios of their investors, including pensions, foundations, and endowments,” said MFA President and CEO Bryan Corbett. “The proposed rule will fundamentally alter the fruitful, longstanding relationships between private funds and their sophisticated investors, who will find it harder to deliver for beneficiaries. Many investors will experience higher fees and decreased transparency. Others will have reduced access to investment opportunities. The SEC should reconsider this ill-advised rule, which will harm pensions, foundations, endowments, and markets.”

Overall, MFA’s comment letter underlines that the proposed rule will have numerous and significant adverse consequences on investors, including higher fees, less negotiating flexibility, and fewer investment choices. MFA’s full comments to the SEC’s proposed rule on Private Fund Advisers can be found here.

MFA also commissioned an assessment of the SEC’s economic analysis included in the proposed rules, which was included in the submission. It found that the analysis did not make a sound case for the proposed rules and that it failed to fully consider the unintended costs associated with the proposals.

In the letter, MFA explains that the SEC’s proposed rule would fundamentally reshape the nature of the relationship between private funds and their investors, discarding the historical disclosure-based regime. From the letter:

“[We] first want to address what we believe to be several fundamental issues with the Proposed Rules taken as a whole, particularly with respect to the proposed prohibitions on private fund advisers’ and sophisticated private fund investors’ ability to define the terms of their commercial relationship. The right to ‘shape that [adviser-client/investor] relationship by agreement, provided that there is full and fair disclosure and informed consent,’ is the decades-long hallmark of the Commission’s regulatory approach to an investment adviser’s fiduciary duty to its clients, including for private fund advisers and private funds.”

MFA argues that the proposed rule would harm rather than protect institutional investors, needlessly upset the carefully constructed arrangements private fund advisers and sophisticated investors have negotiated over many years, and significantly increase legal, regulatory, compliance, and operational costs. This will create steep barriers to entry for new advisers, lead to consolidation and reduced competition in the industry, and limit investment choices available to investors. From the Letter:

“Ironically, by needlessly upsetting the carefully balanced arrangements that private fund advisers and their sophisticated investors have developed over many years, we believe that the Proposed Rules will ultimately harm those investors by significantly reducing their ability to negotiate the terms on which they are able to invest in private funds—thereby disrupting the freedom to contract that is a hallmark of the U.S. free market economy and undermining the competitive advantages that U.S. markets have compared to markets in other countries—and reducing the choices of funds that are available to such investors.”

MFA notes that, ultimately, institutional investors will likely experience higher fees and reduced transparency as a result of the proposed rule. From the letter:

“Alternative investment strategies by their nature require more independent research and other data, more investment staff, and often more complex technology to support them than a typical retail investment product. The likely result of the prohibitions and other rules included in the Release, including but not limited to those related to expenses, is that advisers will charge higher fees, limit the options available to investors, and provide less transparency into the actual costs such fees are meant to offset.”

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About the Global Hedge Fund and Alternative Investment Industry

The global hedge fund and alternative investment industry, including hedge funds, credit, managed futures, and hybrid funds that invest in private companies, has assets under management of $4.3 trillion (Q2 2021). The industry serves thousands of public and private pension funds, charitable endowments, foundations, sovereign governments, and other global institutional investors by providing portfolio diversification and risk-adjusted returns to help meet their funding obligations and return targets.

About the Managed Funds Association

Managed Funds Association (MFA) represents the global hedge fund and alternative investment industry and its investors by advocating for regulatory, tax, and other public policies that foster efficient, transparent, and fair capital markets. MFA’s more than 150 member firms collectively manage nearly $1.6 trillion across a diverse group of investment strategies. Member firms help pension plans, university endowments, charitable foundations, and other institutional investors to diversify their investments, manage risk, and generate attractive returns over time. MFA has a global presence and is active in Washington, London, Brussels, and Asia. www.managedfunds.org